Chancellor Rishi Sunak delivered the annual Budget a few weeks ago. In it, he looked ahead for the year while acknowledging we are still in the middle of a pandemic. Much of the focus was understandably on the ongoing Covid-19 impacts on businesses and individuals. However, the Budget, together with the tax consultations announced later in the month, has provided some temporary relief. We summarise the key points below, focusing those that are likely to affect you and your business. For a more tailored analysis for your circumstances, please get in touch with one of our independent financial advisers at www.plutuswealth.com.
The UK economy took a hit over the past year due to the pandemic, with GDP shrinking by nearly 10% in 2020 according to the Office for Budget Responsibility. However, it is forecast to rebound this year, and to rebound strongly. The vaccination programme rollout has been successful so far and with the continuing support for businesses a growth rate of 4% is projected.This is expected to rise to over 7% next year, with the economy returning to pre-pandemic levels by the middle of 2022.
The dreaded tax rises touted in the media did not materialise in this Budget. While they may be inevitable given the record borrowing and funding made available to weather the Covid-19 storm, now is not the time. Instead, some temporary relief has come in the form of tax freezes.
- Freezing basic and higher rates of income tax thresholds. For basic rate taxpayers, this will be £37,700 and for higher rate taxpayers it is £50,270, starting this financial year. Both these rate freezes apply until 2025–2026. The income tax rates themselves remain unchanged at 20% and 40% respectively.
In the medium term, the threshold freeze could have implications for those whose income grows between now and 2025. If this happens, you may end up falling into the higher tax band sooner.
A predicted wealth tax was not introduced, allowing many to breathe a sigh of relief.
- Capital gains tax exemptions will similarly remain frozen until 2025–26. As a reminder, they are £12,300 for individuals and £6,150 for most trustees. This applies to any profits made following the sale of an asset – for example, a home, shares or personal possessions. The frozen threshold is good news in the short term but could mean a greater proportion of profits is taxed in the medium term as prices rise.
- Inheritance tax rates for nil-rate band and residence nil-rate band remain unchanged until April 2026. They are£325,000 and £175,000, respectively. As with capital gains tax, the short-term implications are positive as there will not be any real rise. However, overtime, a greater proportion of the value of an estate may be subject to inheritance tax.
The personal allowance will increase slightly this year, as previously promised, to £12,570. As with tax bands, this will then be frozen until 2025–26. Similar to income tax thresholds, this could mean a potential decrease in future take-home pay as salaries increase.
The current lifetime pension allowance of £1,073,100 will remain in place until 2026. This is the amount you can pay into your pension in your lifetime before you begin to pay tax. The annual tax-free allowance of£40,000 also remains unchanged. In essence, once inflation is taken into account, the amount you can save that is tax-free over your lifetime could end up being lower.
The attention-grabbing headlines focused on the new corporation tax rate of 25% from April 2023. This is an increase from the current level of 19%. However, this will only apply to those with taxable profits over £250,000. For smaller businesses with taxable profits below £50,000, the current 19% tax rate will remain in place.
Those businesses with taxable profits that fall between these two thresholds will see a tapered rate apply. This is known as marginal relief and goes up to 25%. In practice, this means that most businesses will be paying the lower rate of corporation tax.
Looking for some guidance on what this all means for you?
It is easy to feel overwhelmed when it comes to financial planning and putting wider policy changes into your own financial perspective.Reach out to one of our Plutus Wealth team of independent financial advisers at any time if you have questions or need some advice. Give us a call on 020 7871 5200 or drop us a line at firstname.lastname@example.org and we can set up a time to talk.